C.H. Robinson's Freight Backdrop Challenging; Margins Seeing Near-Term Pressure

Senior Equity Analyst

Matthew Young

C.H. Robinson dominates the $90 billion-plus asset-light truck brokerage market, and its immense network of shippers and asset-based truckers supports a wide economic moat, in our view. Although the company isn't immune to freight pullbacks, its variable-cost model historically helps shield profitability during periods of lackluster volume and pricing, as evidenced by a long history of above-average profitability. The firm's ownership of transportation equipment is minimal, and a large swath of operating expenses are tied to performance-based variable compensation, which moves with net revenue. We think the company remains well positioned to capitalize on gradual truck brokerage industry consolidation (including market share gains) despite intensifying competition.

Over and above underlying demand trends, share gains will probably remain a key growth driver for Robinson long term. For perspective, we estimate Robinson's stake of the domestic freight brokerage industry at roughly 17%-18% in recent years, up from the low teens in the mid-2000s, based on market data from Armstrong & Associates. The truck brokerage business is still vastly fragmented, and small, less sophisticated providers are finding it increasingly difficult to keep up with rising demand for efficient capacity access and the need to automate back office and carrier-facing processes. Robinson's industry-leading network of asset-based truckload carriers (most small) should remain highly valuable to shippers over the long run. This is particularly because truckload-market capacity will probably see recurring growth constraints due in part to the stubbornly limited driver pool. 

Robinson has also positioned its air and ocean forwarding unit to contribute to growth. In this segment, it competes with other top-shelf providers like Expeditors International. In 2012, it purchased Phoenix International, which doubled Robinson's forwarding scale, and organic growth has continued (on average), along with additional tuck-in deals that have boosted the firm's global footprint. Buying scale and lane density are important in order to secure adequate capacity for shippers, particularly during the peak season.

Business Strategy & Outlook

C.H. Robinson maintains a wide economic moat thanks to the network effect. Its industry-leading network of shippers and carriers reinforces a compelling value proposition, and duplication by small providers with fewer resources would be a formidable task. 

In its core North American Surface Transportation segment (61% of net revenue), which largely reflects highway brokerage operations, C.H. Robinson's substantial customer base of more than 40,000 shippers affords significant buying power. As a result, the company can procure capacity at lower rates than shippers could generally obtain directly with carriers, thereby providing customers with opportunities for material cost savings. Shippers also enjoy the added benefit of converting fixed transportation costs (such as a large traffic management department) into variable costs when outsourcing logistics management functions. 

Furthermore, C.H. Robinson's vast network of more than 60,000 asset-based carriers (most small) across most transportation modes acts as a valuable source of capacity for shippers. As in past tightening cycles, the company's unmatched truckload capacity access has proved quite valuable over the years, especially during periods of tight industry capacity (as seen in 2021 and 2022). Additionally, C.H. Robinson's relationships with air, ocean, and rail carriers support multimodal capabilities that optimize shippers' use of truckload, less-than-truckload, and rail intermodal on the domestic front and air and ocean freight for overseas shipping. We believe demand for multimodal solutions is rising, driven in part by shippers' focus on supply chain efficiency. 

From the perspective of carriers (including truckload and LTL), C.H. Robinson is a highly attractive source of freight opportunities, given its ability to aggregate fragmented demand across a broad customer base of shippers. In this way, truckers can minimize empty miles and supplement sales efforts. 

While competitors with sufficient capital can replicate technology, C.H. Robinson's robust proprietary IT platforms provide differentiation from smaller providers with fewer resources. We expect the company to garner additional market share from less capable 3PL competitors as supply chains continue to increase in complexity, requiring sophisticated informational expertise and broad, vetted capacity relationships. C.H. Robinson's strong technology infrastructure, coupled with a vast reservoir of market data, also enhances internal pricing decisions and improves customer connectivity and reporting.

Wide

Economic Moat

C.H. Robinson Worldwide

C.H. Robinson Worldwide, Inc. engages in the provision of freight transportation services and logistics solutions. It operates through the following three segments: North American Surface Transportation and Global Forwarding. The North American Surface Transportation segment provides freight transportation services across North America through a network of offices in the United States, Canada, and Mexico. The Global Forwarding segment provides global logistics services through an international network of offices in North America, Europe, Asia, Australia, New Zealand, and South America. The company was founded by Charles Henry Robinson in 1905 and is headquartered in Eden Prairie, MN.

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Expeditors International of Washington

Matson

The Zacks Industry Rank for the Transportation-Services industry paints a dull picture mainly due to the freight demand slowdown. We believe stocks like EXPD, CHRW and MATX are better positioned to escape industry challenges.

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C.H. Robinson Worldwide, Inc. (NASDAQ:CHRW ) Q2 2023 Earnings Conference Call August 2, 2023 5:00 PM ET Company Participants Dave Bozeman - President, Chief Executive Officer Mike Zechmeister - Chief Financial Officer Arun Rajan - Chief Operating Officer Chuck Ives - Director of Investor Relations Conference Call Participants Jack Atkins - Stephens Scott Group - Wolfe Research David Vernon - Bernstein Christopher Kuhn - The Benchmark Company Jason Seidl - TD Cowen Matthew Spahn - TCW Stephanie Moore - Jefferies Bruce Chan - Stifel Chris Wetherbee - Citi Operator Good afternoon, ladies and gentlemen, and welcome to the C.H. Robinson Second Quarter 2023 Conference Call.

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